Meta Group says that despite its earnings disappointment this quarter, Hewlett-Packard looks basically sound. However, it faces important challenges, and its 2001 performance depends greatly on the health of the cooling economy in the next year.

The company also said that it has ended discussions to acquire the consulting arm of Big Five accounting firm PricewaterhouseCoopers.

For the quarter ended Oct. 31, revenue was $13.3 billion, compared with $11.4 billion a year ago. The Palo Alto, Calif.-based company earned 41 cents per share, compared with 36 cents a year ago. Analysts expected HP to earn 51 cents, according to analysts polled by First Call/Thomson Financial.

HP shares fell $5.50, or about 14 percent, to $33.63 in afternoon trading. The company's news contributed to a sell-off that drove down shares in the Dow Jones industrial average and drove the Nasdaq composite index to a new 52-week low.

The company attributed the shortfall to a number of issues, including margin pressures, adverse currency effects and higher-than-expected expenses.

Today's earnings announcement took Wall Street by surprise. According to FirstCall, HP had been expected to deliver fourth-quarter earnings results on Wednesday.

HP also typically reveals results after the market closes, not before. The timing--coinciding with the first full day of the Comdex trade show in Las Vegas--makes the announcement just one item in a storm of news on Monday.

HP chief executive Carly Fiorina said in a statement she was "very disappointed that we missed our (earnings per share) growth target this quarter due to the confluence of a number of issues that we now understand and are urgently addressing. I accept full responsibility for the shortfall."

Fiorina is scheduled to deliver a keynote address today at Comdex in Las Vegas.

Before this period, HP had posted eight straight quarters that beat analysts' estimates.

Last quarter, HP beat estimates by 12 cents, but a
number of analysts felt that the company may have downplayed weaknesses in its business. Analysts at the time pointed out that HP's Unix
business grew by only 13 percent, far lower than estimates of 26 percent growth, as Fiorina predicted earlier in the year.

On Monday HP said that demand remains strong and that it is sustaining initial growth targets. For fiscal 2001, which ends next October, HP expects to achieve revenue growth in the range of 15 percent to 17 percent, compared with 15 percent growth in fiscal 2000. Total operating expenses in fiscal 2001 are expected to be approximately 10 percent to 12 percent above those of the current fiscal year.

Services deal a no-go
HP also announced that it has not been able to reach an agreement with
PricewaterhouseCoopers regarding its consulting business. HP announced just
two months ago that it was in discussions to buy the global management and
information technology practice for about $18 billion in cash and stock.

"We remain committed to aggressively growing our consulting capabilities,
organically and possibly by acquisition, and are open to other business
arrangements to achieve our goals," Fiorina said.

The earnings shortfall comes as HP reaches a crossroads. The company's PC business has never been better. HP has been the fastest-growing major PC
company in the world for the past two quarters, thanks largely to a strong
consumer push.

The company is positioned to be one of the Big Three in
consumer electronics and computing, along with Sony and Compaq Computer, said Stephen Baker, an analyst with PC Data.

"You can see them getting into DVD players, you can see them getting into
(personal digital recorders) because they already do a lot
of stuff with hard drives. You can see them doing something with
camcorders," Baker said.

Conversely, Fiorina has positioned HP to become a major force in services, so the failure of the PricewaterhouseCoopers bid is a major blow. In addition, the company has lost some of its key players in this regard. Nick Earle, who ran HP's e-services unit, left the company in September to join business-to-business software maker Ariba.

The acquisition of PricewaterhouseCoopers' consulting arm would have given HP a highly trained force of nearly 31,500 technology and business consultants to tap in expanding its reach in the lucrative market for IT services. The move could have made HP a stronger competitor against IBM, which operates one of the largest consulting and services arms with its Global Services division, and against Sun Microsystems, which has steadily been bulking up its services arm.

When acquisition talks were made public, the potential deal appeared favorable on paper, but several critics at the time said the integration of the two entities would be an enormous and extremely complicated task.

For the fourth quarter, HP's sales in the United States climbed 13 percent to $6 billion. Overseas revenue rose 20 percent to $7.3 billion, driven largely by $4.5 billion in sales in Europe and $1.9 billion in the Asia-Pacific region.

Net earnings for fiscal 2000 came in at $1.73 per share, up 16 percent from $1.49 for the preceding fiscal year. Revenues for the year increased 15 percent to $48.8 billion, with sales in the United States up 14 percent to $21.6 billion and sales abroad increasing 16 percent to $27.2 billion.

The company said that revenue in its Unix server business rose 23 percent from last year, with orders up 43 percent in the quarter. The company said that Superdome, its new high-end server unveiled in the fourth quarter, is achieving stronger-than-expected market acceptance and that volume shipments remain on schedule for the month of January. Sales of NetServer machines grew 20 percent for the quarter.

PC sales were up 40 percent, fueled by sales of notebooks, which jumped 164 percent, and home PCs, which increased by 62 percent. Software revenue, excluding the company's VeriFone unit, was up 18 percent from the year-ago period but down sequentially with a large order backlog at the end of the quarter, the company said.

HP's services business, including hardware and software services, outsourcing, and consulting, grew 15 percent over the same period a year ago. The company said its consulting revenue in the quarter grew 46 percent.

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